PSARman

Musings on the Stock of the Week

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Every week we are asked our opinion on a certain stock. It's my opinion that this is a more difficult task for the fundamental analyst than the trader who relies on technical analysis. The "fundies" may vary widely for the first but the "techies" basically rely on what they perceive to be interchangeable truths, be it certain indicators, support and resistance lines, etc. It doesn't matter to me whether it's SIRI, TSO or WB, the indicators and the chart will tell me most of what I need to know to make my decisions. That doesn't mean I tune out everything else. In fact, I am especially watchful for earnings dates and mark them in red on the daily sheets I've made up to track my portfolios. Even a great-looking chart can turn to garbage on these dates if earnings expectations or guidance isn't up to snuff and vice-versa. I think the best way to handle earnings announcements is by using options, either a protective put for long positions, a protective call for short positions or a straddle if a huge unpredictable move is anticipated.

A day before SLO2 started my computer crashed. It took a couple of weeks to get it back and it still wasn't right. Finally, I got things back to normal but in the interim I thought about improvements to what I had been doing. My favorite indicator, the parabolic stop and reverse (PSAR) still left a lot to be desired. I was also using the MACD, stochastics, RSI, and momentum indicators but found more redundancy than enlightenment. I was also using the directional movement index (DMI) but more as an afterthought than anything else.

The DMI is made up of three lines. If a stock is in an uptrend, the +DI (green) line will be above the -DI (red) line and the ADX (black) line will denote the strength of whichever is on top. Simple enough. I arranged my chart so that I could watch all these indicators at once but keeping the DMI intact.

Then it dawned on me that maybe if I rearranged my chart so that the green line, the red line and the black line were plotted separately as well and their values taken every day as I had previously done with the PSAR, it might be of more value.

Early returns are encouraging. Usually these lines only change, if at all, by a point or two each day but Friday, a lot of what I follow made huge moves. DE's +DI went up 5 while it's -DI went down 2 and the ADX went up 1. Similarly, did JOYG except its ADX went up 2. I wish I could say it predicted GOOG's remarkable move but it didn't. It takes a day or two of changed direction to move the DMI but at least it records the change. On Friday GOOG's +DI went from 19 to 41 and the -DI 26 to 18 while the ADX advanced from 19 to 21. I'll be watching the DMI closely for my positions in SLO2 and sell them when they start showing signs of weakness, remembering that the green line might start to wane but the black strength line can keep going up causing a divergence that can't last forever.

Now to WB, the stock of the week. This past week the +DI numbers waned until Friday: 18, 18, 17, 17, 23 while the -DI numbers are steadily falling: 31, 33, 30, 27, 26; and the ADX (strength of the top line [-DI]) was mushy: 16, 17, 18, 18, 17. With the MACD and stochastics giving "buy" signals and the nice move of the +DI from 17 to 23 on Friday and the downward PSAR possibly changing direction, I'd rate it a buy. But there are a lot of other stocks flashing "buy" signals that might be more exciting.

What about last week's stock of the week, TSO. Here are this week's DMI numbers: +DI: 13, 13, 20, 21, 20; -DI: 31, 33, 30, 27, 26. The ADX showed a slight loss in strength of the -DI: 26, 27, 27, 26, 25. The downward PSARs appear to be close to changing direction and the MACD and stochastics are giving "buy" signals. My take is TSO is trying to put in a bottom and some nibbling would be OK with a tight stop. Monday's action is critical.

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